ExpertMedium1 markMultiple Choice
CPA · Question 66 · Area IV: Property Transactions
A cash-basis taxpayer loans $100,000 to their 100% owned accrual-basis corporation. The note requires interest to be paid annually. The corporation accrues the interest expense in Year 1 but does not pay it until Year 2. When can the corporation deduct the interest?
A cash-basis taxpayer loans $100,000 to their 100% owned accrual-basis corporation. The note requires interest to be paid annually. The corporation accrues the interest expense in Year 1 but does not pay it until Year 2. When can the corporation deduct the interest?
Answer options:
A.
Year 1 (when accrued).
B.
Year 2 (when paid).
C.
Never.
D.
Year 1, but only if the shareholder reports income in Year 1.
How to approach this question
Apply §267(a)(2) Matching Rule. An accrual basis payer cannot deduct an expense to a related cash basis payee until the payee includes it in income (Year 2).
Full Answer
B.Year 2 (when paid).✓ Correct
B
IRC §267(a)(2). The corporation is placed on the cash method for this transaction to match the shareholder's recognition.
Common mistakes
Applying standard accrual rules.
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